Lessons from the Shale Revolution

A closer look at the shale gas story challenges both conservative and liberal policy preferences and points to much-needed reforms for today’s mash of state and federal clean energy subsidies and mandates.

In his State of the Union address, President Obama invoked the 30-year history of federal support for new shale gas drilling technologies to defend his present day investments in green energy. Obama stressed the value of shale gas—which will create thousands of jobs and billions in profits—as part of his “all of the above” approach to energy, and defended the critical role government investment has always played in developing new energy technologies, from nuclear to solar panels to wind turbines.

The president’s remarks unsurprisingly sparked a strong response from some conservatives (here, here, here, and here), who have downplayed and even attempted to deny the important role that federal investments in hydrofracking, geologic mapping, and horizontal drilling played in the shale gas revolution.

This is an over-reaction. In acknowledging the critical role government funding played in shale gas, conservatives need not write a blank check for all government energy subsidies. Indeed, a closer look at the shale gas story challenges liberal policy preferences as much as it challenges those of conservatives, and points to much-needed reforms for today’s mash of state and federal clean energy subsidies and mandates.

The Government’s Role

Virtually all subsequent commercial fracturing technologies have been built upon the basic understanding of hydraulic fracturing first demonstrated by the Department of Energy in the 1970s.

Some have pointed to the fact that fracking dates back to the 19th century and hydraulic fracking to the 1940s as evidence that federal funding for today’s fracking technologies was unimportant. But dismissing the importance of federal support for new shale gas technologies in the ’70s and ‘80s because private firms had succeeded in fracking for oil in the ’40s and ’50s is like suggesting that postwar military investments in jet engines were unnecessary because the Wright Brothers invented the propeller plane in 1903.

Enhancing oil recovery from existing wells in limestone formations by injecting various combinations of water, sand, and lubricants, as was done by private firms starting in the 1940s, is a vastly different and less complicated technical challenge than recovering widely dispersed gas methane in rock formations like shale that are simultaneously porous but not highly permeable.

Recovering gas from shale formations at a commercial scale requires injecting vastly more water, sand, and lubricants at vastly higher pressures throughout vastly larger geological formations than anything that had been attempted in earlier oil recovery efforts. It requires having some idea of where the highly diffused pockets of gas are, and it requires both drilling long distances horizontally and being able to fracture rock under high pressure multiple times along the way.

The oil and gas industries had no idea how to do any of this at the time that federal research and demonstration efforts were first initiated in the late 1960s—indeed, throughout the 1970s the gas industry made regular practice of drilling past shale to get to limestone gas deposits.

Federal investments in applied research and demonstration of new green energy projects ought to be similarly insulated from political meddling and rent seeking.

This is not just our opinion, it was the opinion of the natural gas industry itself, which explicitly requested assistance from the federal government in figuring out how to economically recover gas from shale starting in the late 1970s. Indeed, shale gas pioneer George Mitchell was an avid and vocal supporter of federal investments in developing new oil and gas technologies, and regularly advocated on behalf of Department of Energy fossil research throughout the 1980s to prevent Congress from zeroing out research budgets in an era of low energy prices.

Early Efforts

The first federal efforts to demonstrate shale gas recovery at commercial scales did not immediately result in commercially viable technologies, and this too has been offered as evidence that federal research efforts were ineffective. In two gas stimulation experiments in 1967 and 1969, the Atomic Energy Commission detonated atomic devices in New Mexico and Colorado in order to crack the shale and release large volumes of gas trapped in the rock. The project succeeded in recovering gas, but due to concerns about radioactive tritium elements in the gas, the project was abandoned.

These projects are easy to ridicule. They sound preposterous to both anti-nuclear and anti-government ears. But in fact, the experiment demonstrated that it was possible to recover diffused gas from shale formations—proof of a concept that had theretofore not been established.

A few years later, the just-established Department of Energy demonstrated that the same result could be achieved by pumping massive amounts of highly pressurized water into shale formations. This process, known as massive hydraulic fracturing (MHF), proved too expensive for broad commercialization. But oil and gas firms, with continuing federal support, tinkered with the amount of sand, water, and binding agents over the following two decades to achieve today’s much cheaper formula, known as slickwater fracking.

In acknowledging the critical role government funding played in shale gas, conservatives need not write a blank check for all government energy subsidies.

Early federal fracking demonstrations can be fairly characterized as big, slow, dumb, and expensive. But when it comes to technological innovation, the big, slow, dumb, and expensive phase is almost always unavoidable. Innovation typically proceeds from big, slow, dumb, and expensive to small, fast, smart, and cheap. Think of building-sized computers from the 1950s that lacked the processing power to run a primitive, 1970s digital watch.

Private firms are really good at small, fast, smart, and cheap, but they mostly don’t do big, slow, dumb, and expensive, because the benefits are too remote, the risks too great, and the costs too high. But here’s the catch. You usually can’t do small, fast, smart, and cheap until you’ve done big, slow, dumb, and expensive first. Hence the reason that, again and again, the federal government has played that role for critical technologies that turned out to be important to our economic well-being.

Drilling Down into Innovative Methods

In fact, virtually all subsequent commercial fracturing technologies have been built upon the basic understanding of hydraulic fracturing first demonstrated by the Department of Energy in the 1970s. That included not just demonstrating that gas could be released from shale formations, but also the critical understanding of how shale cracks under pressure. Scientists learned from the large federal demonstration projects in the 1970s that most shale in the United States fractures in the same direction. This led government and industry researchers to focus their efforts on technologies that would allow them to drill long distances horizontally, in a direction that situated the well hole perpendicular to the directions that fractures would run, which allowed firms to capture much more gas from each well.

Government and industry researchers also focused on developing the ability to create multiple fracks from each horizontal well, and in 1986 a joint government-industry venture demonstrated the first multifrack horizontal well in Devonian Shale. During the same period, government researchers at Sandia Laboratory developed tools for micro-seismic mapping, a technique that would prove critical to the development of commercially viable fracking. Micro-seismic mapping allowed firms to see precisely where the cracks in the rock were, and to modulate pressure, fluid, and proppant in order to control the size and geometry of each frack.

Early federal fracking demonstrations can be fairly characterized as big, slow, dumb, and expensive. But when it comes to technological innovation, the big, slow, dumb, and expensive phase is almost always unavoidable.

George Mitchell, who is widely credited with having pioneered the shale gas revolution, leaned heavily upon these innovations throughout the 1990s, when he finally put all the pieces together and figured out how to extract gas from shale economically. Mitchell had spent over a decade consolidating his position in the Barnett Shale before he asked for technical assistance from the government. “By the early 1990s, we had a good position, acceptable but lacking knowledge base,” Mitchell Energy Vice President Dan Steward told us recently.

Mitchell turned to the Gas Research Institute and federal laboratories for help in 1991. GRI paid for Mitchell to attempt his first horizontal well. The Sandia National Laboratory provided Mitchell with the tools and a scientific team to micro-seismically map his wells. It was only after Mitchell turned to GRI and federal laboratories for help that he finally cracked the shale gas code.

A Counterfactual?

But so what? Federal investments in new gas technologies may have proved critical to the shale gas revolution, but could they have happened without those investments? Where is the counterfactual?

Constructing a counterfactual can be a useful analytical method, but it can be abused. In this case, the counterfactual has been asserted as a kind of faith-based defense against the inconvenient history of the shale gas revolution. Nobody has offered a real world example—for instance, a country where private firms developed economical shale gas technology without any public support.

The natural gas industry itself explicitly requested assistance from the federal government in figuring out how to economically recover gas from shale starting in the late 1970s.

Nor has anyone offered a detailed historical analysis to justify the claim that private entrepreneurs would have done the critical applied research, developed the fracking technologies, funded the explorations in new drill bits and horizontal wells, and created the micro-seismic mapping technologies that were all required to make the shale revolution possible. A close look at the development of those technologies reveals private sector entrepreneurs, like Mitchell, who were loudly and clearly asking for help because they knew they had neither the technical knowledge nor the ability to finance such risky innovations on their own.

The Implications for Renewable Energy Subsidies

In the end though, we are mostly having this debate now because historical federal investments in shale gas are being compared to current investments in renewables. There is much that is in fact comparable—the federal role in the shale gas revolution went well beyond basic research, as some have claimed, and matches up with current renewables programs virtually demonstration for demonstration, tax credit for tax credit, and dollar for dollar when comparing the scale and nature of present federal support for renewables with past support for unconventional gas. But that doesn’t mean that President Obama’s subsidies for green energy are immune to criticism.

Indeed, once we acknowledge the shale gas case as a government success, not a failure, it offers a powerful basis for reforming present clean energy investments and subsidies. Federal subsidies for shale gas came to an end, and so should federal wind and solar subsidies, at least as blanket subsidies for all solar and wind technologies. In many prime locations, where there is good wind, proximity to transmission, state renewable energy purchase mandates, and multiple state and federal subsidies, wind development is now highly profitable.

If federal investments in wind and solar are really like those in unconventional gas, then we ought to set a date certain when blanket subsidies for wind and solar energy come to an end. Imposing a phase-out of production subsidies would encourage sustained innovations and absolute cost declines. We might want to extend continuing support for some newer classes of wind and solar technologies, those that are innovating new technological methods to generate energy, or those that are specifically designed to perform better in lower wind or marginal solar locations. But in the ’80s and ’90s we did not provide a tax credit to all gas wells, only those using new technologies to recover gas from new geologic formations—and we should not continue to provide subsidies to wind and solar technologies that are already proven and increasingly widely deployed with no end in sight.

Nobody has offered a real world example—for instance, a country where private firms developed economical shale gas technology without any public support.

Another key lesson is that many of the most important research and demonstration projects in new shale gas technologies were funded and overseen by the Gas Research Institute, a partnership between Department of Energy laboratories and the natural gas industry that was funded through a small Federal Energy Regulatory Commission-administered fee on gas prices. GRI had both independence from Congress and the federal bureaucracy, and strong representation from the natural gas industry, which allowed it to focus research and dollars on solving key technical problems that pioneers like George Mitchell were struggling with. Federal investments in applied research and demonstration of new green energy projects ought to be similarly insulated from political meddling and rent seeking.

These and other lessons from the shale gas revolution point to far-reaching reforms of federal energy innovation and subsidy programs. If the history of the shale gas revolution challenges the tale of a single lone entrepreneur persevering without help from the government, it also challenges the present federal approach to investing in renewables in important respects. The history of federal support for shale gas offers as much a case for reform of current federal clean energy investments as it does for their preservation.

Michael Shellenberger is president of the Breakthrough Institute, and Ted Nordhaus is chairman of the think tank.